China Galaxy Securities has released a research report stating that the narrative surrounding the Hong Kong stock market's favorable risk-reward profile will persist. However, it is expected to transition from broad-based valuation recovery to a phase of structural defense and strategic early positioning. The Hong Kong market is currently in a contradictory stage: while valuations appear to have a floor, external liquidity pressures are creating a headwind. The market is experiencing short-term volatility and divergence. Should these external pressures ease in the medium term, the potential for valuation recovery in Hong Kong stocks remains significant. The investment strategy should focus on three key themes:

(1) The technology sector. The recommendation is to concentrate on semiconductors and hardware equipment. Previously popular AI concept stocks have undergone significant corrections, and short-term downward pressure persists. It is advisable to avoid overheated targets and consider positioning after the adjustment phase. The investment thesis for AI application companies expanding overseas remains intact, with potential new model releases in May, warranting continued attention.

(2) The biopharmaceutical sector. With the ASCO conference approaching, the window for strategic allocation remains open. Investors can focus in advance on individual stocks with high earnings certainty.

(3) High-dividend/yield assets. Utilities stocks are particularly attractive as they benefit from the overseas expansion theme for power equipment, offering a combination of defensive qualities and growth potential.

Key observations from China Galaxy Securities are as follows:

**Hong Kong Market Performance:** Last week, while major global broad-market indices generally rose, the Hang Seng Index fell by 0.78%, the Hang Seng Tech Index declined by 0.63%, and the Hang Seng China Enterprises Index dropped by 1.07%.

**Sector Performance:** Among primary sectors in Hong Kong, eight industries advanced while three declined last week. The energy sector led gains, rising 4.19%, followed by real estate and communication services. Conversely, industrials, materials, and healthcare sectors were among the decliners.

**Market Liquidity:** The average daily trading volume on the Hong Kong Exchange increased week-over-week. Short selling activity also rose, with the average daily short-selling amount and its proportion of total turnover both increasing. Southbound capital flows into Hong Kong saw a net inflow last week. Regarding foreign capital flows into Hong Kong-listed Chinese stocks, global active funds recorded a net outflow over a recent seven-day period, while passive funds recorded a net inflow, though both flows decreased compared to the prior week.

**Valuations and Risk Appetite:** As of a recent date, the valuation metrics for the Hang Seng Index were at specific historical percentile levels. Concurrently, the yield on the 10-year US Treasury note rose, and the risk premium for the Hang Seng Index was at an extremely low historical percentile.

**Sustainability of the 'Value Proposition' Narrative:** While the narrative persists, its nature is changing from "universal undervaluation" to "structural undervaluation," particularly within sectors like technology and high-dividend energy stocks. High oil prices present a mixed picture for Hong Kong stocks, benefiting certain sectors but pressuring overall valuations by pushing up US bond yields. The attractiveness of Hong Kong stocks relative to US bonds is at a historically low level, reducing their appeal to foreign investors. For the value narrative to be sustained, a decline in US bond yields or an upward revision to Hong Kong corporate earnings is needed. Overall, Hong Kong market valuations are not cheap, but structural opportunities remain.

**Risk Warning:** Potential risks include domestic policy measures falling short of expectations, overseas interest rate cuts being less aggressive than anticipated, and unstable market sentiment.